COMPAT: NSE Guilty Of Abuse of Dominant Position!

In a landmark judgment today, the Competition Appellate Tribunal upheld the 2011 order of the Competition Commission of India that had found National Stock Exchange guilty of abuse of dominant position. The Tribunal also upheld the Rs 55.5 crore penalty levied by the regulator in its order.

Here's a quick background to the case-

In the MCX-SX vs NSE case, the CCI held that NSE has abused its dominant position in the currency derivates segment to oust competitors and fined the stock exchange a penalty of Rs 55.5 crores. Accompanying the order was also a dissent note by 2 CCI members who felt NSE is not guilty.

Relevant Market

CCI, through a 4-2 majority, outlined ‘stock exchange services in respect of currency derivatives (CD) segment in India’ as the relevant market. The CCI noted that the stock exchange services provided for CD segment are similar to those provided for other segments – such as ‘over the counter’ segment – but they are not ‘interchangeable or substitutable’, the test provided under the Competition Act, 2002.

Presence in 1486 cities and town across India (against MCX’s presence through 450 centres in CD segment)

High degree of vertical integration in trading platform

The CCI also noted NSE’s market share in other segments such as the equity segment (71% in 2008-09); F&O (almost 100%); WDM (more than 90% since past 6-7 years); aggregate of F&O, Wholesale Debt Market (WDM) and CD segment (92% as of 2008-09). The CCI also noted that as of October 2010, the relevant market of CD segment is a triopoly (34% with MCX, 30% with NSE and 36% with the latest entrant the United Stock Exchange).

CCI emphasized that in Indian context, standalone market share figures is not dispositive but market share along with other factors need to be taken into account to find 'dominant position'. CCI held NSE abused its dominant position through transaction fee waiver, admission and deposit fee waiver and data feed waiver in CD segment. CCI noted that none of these waivers were available in non-CD segments.

Abuse of Domiance

CCI concluded NSE's dominance in the currency derivatives segment based on the following parameters:

Predatory pricing/predatory intent

Past conduct

Leveraging from other businesses

Exclusionary conduct

Predatory pricing/predatory intent

CCI held NSE abused its dominant position through unfair, destructive pricing in the CD segment. CCI rejected NSE’s contention that no fixed costs are incurred on CD segment and held that ‘zero’ pricing is undoubtedly below cost.

Past conduct

Involved NSE waiving off the transaction fee in the F&O segment vis-à-vis BSE and then raising it when liquidity in BSE became practically nil. Fees was not waived in equity segment. Behavior in Gold ETF and Hang Seng Benchmark Exchange traded scheme were also noted. CCI concluded NSE's historical conduct shows inconsistency and so NSE's contention that it waives off fees to develop nascent market cannot be sustained.

Leveraging from other businesses

CCI held that NSE abused its dominant position by leveraging its position of strength in the non- CD segment to protect its position in the CD segment through fee waivers, denial of access interface code and distribution of software for free.

Exclusionary conduct

CCI held that NSE abused its dominant position through discriminatory denial of access interface code for the software for brokerage solution developed by FTIL, one of the promoters of MCX.

The regulator noted that NSE/DotEx abused their dominant position through their exclusionary conduct of denying access interface code and putting FTIL on watch list in the aftermarket for software for trading on NSE;

CCI Order

CCI rejected NSE’s contentions for mitigation of penalty on the grounds of novel legislation, lack of precedence, uncertainty about application, absence of intent etc., and held the following:

NSE to cease-and-desist from unfair pricing;

NSE to maintain separate accounts for each segment from 1 April, 2012;

COMPAT has held that NSE had an intention to indulge in predatory pricing. Tribunal noted that NSE’s Pricing Committee did not specify in any of the minutes of its meetings that the pricing was in consonance with the Competition Act.

We asked competition lawyers for their first take on COMPAT’s order. Here’s there quick first take.

Samir GandhiPartner, AZB“The computation of a predatory price, coupled with an assessment of an intent to predate are two distinct but inter-related parts both of which need to be satisfied in order to arrive at a finding that NSE was engaged in price predation. To establish whether NSE was indeed providing services at a predatory price, it is simply not adequate for the COMPAT to assume that a zero price, is necessarily a predatory price. This is because according to the prescribed CCI Guidelines- a predatory price is a price below “average variable cost”; and for NSE which was already providing a number of stock exchange services, the variable costs involved in providing an additional currency derivative trading service could theoretically have been zero. Therefore, in my view the COMPAT seems to have taken a generalist, equity-based view of the concept of predatory pricing in competition law rather than apply specific competition rules which may not have supported its conclusion.”

Suhail NathaniPartner, ELP“The dismissal of NSE appeal by the COMPAT is a decision which will have important implications, especially in relation to pricing policies of dominant enterprises.

Now, it will no longer be easy for dominant enterprises to lower the prices (to oust the competitor) without any objective justification to support such revision. COMPAT’s decision to hold ‘zero-pricing’ as predatory pricing to eliminate competition is particularly noteworthy as will make it difficult for dominant enterprises to leverage their dominance to enter into new markets.

Although, the NSE order of the CCI lead to imposition of fee on customers trading in currency derivatives segment, the same was taken keeping in mind the broad principles of competition law, which is to ensure that there exists enough competition in the market and that the entrants are not forced-out of the market due to the anti-competitive activities of the enterprises, which are in dominant position. There will be significant long term benefits from having a competitive market over short term free services.

However, it would be interesting to see COMPAT’s analysis on the relevant market, given that it has broadened the market to hold NSE dominant, which ordinarily would be divided segment-wise. Further, the language on the resolutions needs to be looked at close, as it appears to impose a burden on the board which goes beyond the statute.”

Farhad SorabjeePartner, JSA“On a very cursory viewing of the order, it is apparent that the tribunal has chosen to adopt a robust and equity-based approach, which is always salutary for the interpretation of laws which are essentially equitable in objective such as competition law.

Its interpretation of the relevant market relies on a commonsense approach, as signified by the apt referral to the analogy drawn with dry cleaning services. The order appears to effectively distinguish several merger cases which adopt a contrary view, and mentions the real issue at the heart of the practice in this case, namely the ability of the NSE to use its generally pre-eminent position to effect what is, simply put, a squeeze on its competitor for one of the products it (and its competitor) offer a platform to serve.”